"Winning Israel over to rugby union is a major boost for the ... Waratahs and an exciting prospect for Super Rugby fans across Australia," Waratahs chief executive Jason Allen said.
"As a player, Israel clearly has an exceptional talent but what was equally important to us was the enormous level of respect he commands from those who know him and have worked with him."
The 23-year-old Folau left Australian Football League club Greater Western Sydney Giants on November 1, citing a lack of passion for the game after two seasons in which he failed to come to grips with the skills of the indigenous Australian code.
He had been lured to the expansion franchise to help boost the profile of the sport in Sydney's growing western suburbs following a successful career with Melbourne Storm and the Brisbane Broncos in Australia's National Rugby League.
Folau had been expected to return to rugby league amid protracted negotiations with the Sydney-based Parramatta Eels, but the talks fell through, fuelling further media speculation he was pursuing a rugby contract overseas.
"I didn't promise anyone anything. There were no promises at all," Folau said at a media conference with Waratahs' coach Michael Cheika in Sydney.
"As I said at the press conference when I left the Giants, I was keeping my options open, and was looking at rugby league and rugby.
"I met with Parramatta on Friday, met them face to face and told them how I was feeling, I have nothing to hide."
Folau said the failure to strike a deal with the Eels was not about the money.
"If I was here for the money I would have stayed with the AFL for the remaining two years of my contract," added Folau, whose multi-million dollar deal with the Giants was one of the most lucrative in the game.
Folau, who played centre, wing and full-back in rugby league, was well known for his finishing skills and could add punch to a Waratahs backline that has stagnated in recent seasons.
"Israel has a brilliant capability to beat a man one-on-one and great aerial skills that are very important these days," Cheika said.
"He's got a natural ability to read the game and assess attacking opportunities.